Info Edge - Core business continues to remain under pressure - Centrum

We maintain Hold rating on Info Edge given the uncertainty in the recruitment business which continues to grow in single digits in the current challenging macro environment. We believe the upside due to strong traction in 99acres, expected uptick in recruitment in FY15E and healthy valuations of Rs9.6bn for Zomato is factored in the stock price after the 45% rally in past three months. We now value the company on SoTP compared to our earlier PE approach as some investments and other businesses have achieved significant scale. Hence we arrive at a target price of Rs495.

- Recruitment business to remain under pressure in near term: We believe weak macro environment led to single digit growth in recruitment business in the past three quarters and we expect this trend to continue for a couple of quarters more as GDP growth is below 5%. Growth in recruitment business is highly correlated to GDP growth particularly of the services sector which for the first time in last eight years has dropped below 6%. Though it is hearting to witness market share gain by the company in these challenging times, we believe revenue traction will come only on the back of uptick in GDP growth which we expect in early FY15. Hence we have modelled 18% growth in the recruitment business for FY15E compared to 10.4% in FY14E.

- 99acres to become a strong revenue driver: We believe the online real estate classifieds market is highly under penetrated and has strong growth potential. It is currently at an inflection point even in the challenging macro environment. 99acres, a market leader with ~35% market share, is growing at a healthy rate on the back of new property launches. We believe this business will continue to grow at a healthy rate following the shift from print advertisement to online, company's entry into new markets coupled with gaining market share in existing markets and focus on secondary sales.

- Success in investee companies could have significant upside: Info Edge continues to make strategic investments across verticals in early stage ventures and has invested Rs3.5bn till date. However, the company had a setback and wrote off/exited its investment worth Rs356mn across three portals. We believe the company will invest further in some of these portals depending on the scale-up. Recently, Info Edge, along with Sequoia Capital, invested $37mn in the company and valued it at Rs9.6bn where Info Edge's stake was 50.1%. We believe similar success in any of the other companies would offer a significant upside to shareholders in the long run.

- Valuations & Risks: We now value the company on SoTP compared to our earlier PE approach because some investments and other businesses have achieved significant scale. Hence we arrive at a target price of Rs495 with recruitment business at 20x Sept 2015 (Rs274/share), 99acres at Rs69/share, other non-recruitment businesses at Rs26/share (4x EV/Sales), Zomato at Rs44/share while other investments are valued at Rs16/share (1x BV) and the cash at Rs66/share. We maintain Hold rating on the stock and believe the upside could be swift turnaround in the recruitment business and value unlocking in investee companies while downside risk could be margins going under pressure, further pressure in the core recruitment business and write-offs in investee companies.

Source : Equity Bulls

Keywords